What is foreign exchange margin trading?

Foreign exchange margin trading: refers to signing a contract with a (designated investment) bank, opening a trust investment account, depositing a sum of funds (margin) as a guarantee, and setting the credit operation limit (ie, the investment) bank (or brokerage) 20-400 times the leverage effect, more than 400 times is illegal). Investors can freely buy and sell spot foreign exchange of the same value within the quota, and the profit and loss caused by the operation will be automatically deducted from or deposited into the above investment account. Allow small investors to use smaller funds to obtain larger transaction quotas, enjoy the use of foreign exchange transactions as a hedge against risks like global capital, and create profit opportunities in exchange rate changes. On the whole, foreign exchange speculation is an investment activity. The various platforms and products of foreign exchange margin are different, and foreign exchange leverage and margin are directly related to the profit and loss of foreign exchange transactions.

What is foreign exchange margin trading

Leverage in foreign exchange is also called virtual trading and margin trading. That is, investors use their own funds as a guarantee to enlarge the financing provided by banks or brokers to conduct foreign exchange transactions, that is, enlarge investors’ trading funds. The proportion of financing is generally determined by the bank or broker. The larger the proportion of financing, the less funds the customer needs to pay.

The common foreign exchange leverage is 100 times, 200 times and 400 times. The international financing multiples or leverage ratios are between 20 times and 400 times. The standard contract in the foreign exchange market is 100,000 yuan per lot (referring to the base currency , Which is the previous currency of the currency pair), if the leverage ratio provided by the broker is 20 times, a margin of 5,000 yuan (if the trading currency is different from the account margin currency, conversion is required); if the leverage ratio If it is 100 times, a deposit of 1,000 yuan is required to buy and sell one lot. The reason why banks or brokers dare to provide a larger proportion of financing is because the average daily fluctuation of the foreign exchange market is very small, only about 1%, and the foreign exchange market is continuous trading, coupled with perfect technical means, banks or brokers are completely Investors’ lower margin can be used to withstand market fluctuations without them having to take risks themselves. Foreign exchange guarantee metals are traded in spot, and have some characteristics of futures trading, such as buying and selling contracts and providing financing, but its positions can be held for a long time until they take the initiative or are forced to liquidate their positions.

Features of foreign exchange margin trading:

1: The capital is low, generally not less than 10% of the actual investment.

2: T+0 trading mode, that is, buy and sell, investors can instantly trade according to their own wishes or market trends.

3: Buy up and buy down, two-way trading, both up and down have profit opportunities.

4: Variety of varieties, any internationally convertible currency can be used as a transaction variety.

5: Risk is controllable, price limit and stop loss point can be preset.

6: 24-hour trading, you can participate at any time.

7: The transaction volume is large and it is not easy to fall into human manipulation.

8: Foreign exchange margin transactions must calculate the interest difference between various currencies, and financial institutions must pay or deduct from the customer’s margin.

How to make good use of foreign exchange margin and leverage

Margin + leverage = a potentially fatal combination

Currency transactions in the form of foreign exchange margin can increase purchasing power.

This means that if you have USD 5,000 in a margin account that allows 100:1 leverage, you can trade currencies worth up to USD 500,000 because you only need to provide 1% of the purchase price as a deposit.

Another way to express it is that you have a purchasing power of $500,000. With high purchasing power, you can increase the total return on investment while spending a small amount of cash. But be careful, trading on margin magnifies your profits and also magnifies your losses.

Margin call

All traders are afraid of annoying margin calls. It appears when your broker reminds you that your margin balance is lower than the required minimum margin level due to the wrong direction of your judgment.

Although trading on margin can be used as a profitable investment strategy, it is important to take the time to understand the risks.

Make sure you fully understand how the margin account works, and be sure to read the margin agreement between the broker and you. If you do not understand the content of the agreement, you must ask.

If your free margin falls below the predetermined threshold, part of your position will be liquidated, or all of it will be. You may not receive a margin call until your position is liquidated.

In case the funds in your account are lower than the margin requirement (available margin), your broker will close some or all of your positions. This will avoid negative balances in your account, even in highly volatile and rapidly changing markets.

By regularly monitoring account balances and using stop loss settings for each position to limit risk, it is possible to effectively avoid margin calls.

Margin is a very sensitive topic. Some people think that too much margin is very dangerous. It depends on the individual and his/her knowledge and training.

If you want to trade on a margin account, it is important to understand the broker’s margin account policy. It is also very important that you understand these policies and adapt to the risks involved.

You need to know that many brokers require higher margins on weekends. The working day margin may be 1%, but if you want to keep your existing positions on the weekend, the margin may rise to 2% or higher.